CH 13 Principals o Execute the Judgment owners of a business entity one person business entity with minimal filing Sole proprietorship requirements order for the defendant to pay the amount of the judgment the plaintiff may take certain steps to collect the money owed from the defendant In extreme cases this may take the form of seizing the defendant s personal property for sale by the sheriff or garnishing the wages of the defendant if a winning plaintiff has obtained a court Partnership an ongoing business relationship in which profits and losses are shared multiple person business entity where the partners conduct o Key Point general partners personal assets are at risk for the full amount of the debts and liabilities of the partnership jointly all partners together and severally each and every partner separately regardless of their percentage of ownership interest in the partnership of the business do not have authority to bind the partnership and remain primarily as investors limited partners may not participate in daily management o Key Point Pass through entity Express partnerships partnerships formed when the parties have agreed legal principle that imposes liability on partnerships formed when the parties have acted business relationship between 2 or more parties for a to conduct a partnership on certain terms and conditions Implied partnerships like general partners even if the parties did not agree or intend to form a partnership Joint venture limited in time venture Jointly and severally liable partners both together jointly and separately severally for debts and liabilities of the partnership such as a partnership Rather any profits are taxed at individual rates when distributed to the partners partners have the duties of loyalty care and good faith to ensure they are acting in the best interest of the partnership government authority by the general partner to form a limited partnership requiring routine information such as the names addresses and capital contribution of each partner one partner from the partnership term used by the RUPA to describe the act of separation of under the Revised Uniform Partnership Act general business entity that does not pay corporate taxes the document filed with the state Certificate of limited partnership Fiduciary duties Dissociation o Key Point Impact of a dissociation withdrawal the dissociation under the RUPA in a general partnership or withdrawal under the RULPA in a limited partnership does not result in automatic dissolution so long as the remaining partners wish to continue term used by the RULPA to describe the act of separation of Withdrawal one partner from the partnership o Key Point Impact of a dissociation withdrawal the dissociation under the RUPA in a general partnership or withdrawal under the RULPA in a limited partnership does not result in automatic dissolution so long as the remaining partners wish to continue Winding up paid and remaining assets are liquidated distributed period after dissolution where debts of the partnership are Concept Summary Sole Proprietorship vs Partnerships SOLE PROPRIETORSHIPS PARTNERSHIPS LP AND GP FORMATION Low start up costs and minimal filing One person entity LIABILITY OF PRINCIPAL S All debts liabilities of the business are the personal liabilities of the sole proprietor All of proprietor s assets are at risk to satisfy business debts and liabilities CAPITAL Proprietor uses personal assets of bank loan secured by personal assets Minimal filing requirements Partnership agreement may result in some legal fees GP has 2 or more partners LP must have at least 1 GP and 1 ore more LPs GP each GP is jointly severally liable for debts liabilities of the partnership All personal assets of the GP are at risk LP personal assets of the LPs are not at risk for debts liabilities of the entity Partners each contribute capital as needed The partnership agreement governs how when additional calls for partners contributions are made Bank loans secured by partnership assets TAXES All income taxes of the business are paid at the proprietor s individual tax rate reported on the proprietor s individual income tax return Miscellaneous state local taxes to operate business MANAGEMENT CONTROL One person entity and or personal guarantees No taxation at the partnership entity level All income tax of the business passes through the partnership is distributed to the partners and is paid at the individual tax rate of the receiving partner Partnership files information return to inform IRS of profits or losses Miscellaneous state local taxes to operate business Management control as outlined in partnership agreements or under RUPA UPA if not agreed upon LP cannot have day to day involvement Duty of good faith fiduciary duty owed by partners DESIGNATION John Doe d b a Doe Consulting Services Doe Partners GP Doe Partners LP Concept Summary Partner Dissociation Withdrawal and Dissolution of the Partnership The RUPA lists a variety of events of dissociation including voluntary separation expulsion incapacity death that are termed rightful dissociations In a rightful dissociation the withdrawing partner is no longer liable for postdissociation liabilities of the partnership In a wrongful dissociation e g one that violates the partnership agreement the withdrawing partner is liable for any damages the withdrawal caused The RULPA plays a less significant role in a limited partnership context b c so many limited partnerships operate under detailed agreements Under the RULPA a general partner may withdraw at any time w o causing dissolution Limited partners are subject to restrictions on withdrawal Partnerships may also be dissolved if the partnership has reached its agreed upon term by court order or by unanimous consent of the parties Homework Questions Liability Personal Assets at Risk Capitalization Selling Ownership Taxation Pass Through Entity Management Day to Day Involvement in Business Operations 1 Which of the following is an important factor in choosing a business entity a Ease of formation b Management and operation c Funding of the entity the proposed name of the venture is not relevant to choosing the entity 2 Edgar and Julie are co owners of a business entity Because of this ownership interest they are referred to as the venture s a Principals owners of a business entity are referred to as principals 3 Lewis wishes to break off from Clarke Company and form his own business with 100 percent ownership for